Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
5
C HAPTE R
The U. S. Economy:
Private and Public Sectors
State & Local
Finance
Key Terms
Previous
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Next
Slide
End
Show
5-1
Copyright McGraw-Hill/Irwin, 2005
HOUSEHOLDS AS INCOME RECEIVERS
Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
FUNCTIONAL DISTRIBUTION
WAGES
INTEREST
RENT
PROFIT/LOSS
Public Sector:
Government’s Role
Government
Finance
PERSONAL DISTRIBUTION
State & Local
Finance
Key Terms
Previous
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Next
Slide
SHOWS ALLOCATION OF
INCOME AMONG INDIVIDUAL
HOUSEHOLDS
End
Show
5-2
Copyright McGraw-Hill/Irwin, 2005
HOUSEHOLDS AS INCOME RECEIVERS
Households as
Income Receivers
FUNCTIONAL DISTRIBUTION
Households as
Spenders
WAGES
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
Previous
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End
Show
5-3
Next
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$5,977 Billion
72%
PROPRIETOR’S 757 Billion
INCOME
9%
CORPORATE
PROFITS
787 Billion
9%
INTEREST
684 Billion
8%
RENTS
142 Billion
2%
2002 DATA
Copyright McGraw-Hill/Irwin, 2005
HOUSEHOLDS AS INCOME RECEIVERS
Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
Previous
Slide
PERSONAL DISTRIBUTION
Personal Income (Percent)
3.5% Lowest 20% Income Group
8.7%
Second 20% Income Group
Middle 20% Income Group
14.6%
Fourth 20% Income Group
23.0%
Next
Slide
50.2%
Highest 20% Income Group
2002 DATA
End
Show
5-4
Copyright McGraw-Hill/Irwin, 2005
HOUSEHOLDS AS SPENDERS
Households as
Income Receivers
Households as
Spenders
The Business
Population
WHERE DOES OUR INCOME GO?
3% to personal saving
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
Previous
Slide
End
Show
Next
Slide
2002 DATA
$291
Billion
5-5
Copyright McGraw-Hill/Irwin, 2005
HOUSEHOLDS AS SPENDERS
Households as
Income Receivers
Households as
Spenders
The Business
Population
WHERE DOES OUR INCOME GO?
3%
13% to personal taxes
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
Previous
Slide
End
Show
Next
Slide
2002 DATA
$291 $1,114
Billion Billion
5-6
Copyright McGraw-Hill/Irwin, 2005
HOUSEHOLDS AS SPENDERS
Households as
Income Receivers
Households as
Spenders
The Business
Population
WHERE DOES OUR INCOME GO?
3%
13% 84% to personal consumption
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
Previous
Slide
End
Show
5-7
Next
Slide
2002 DATA
$291 $1,114
$7,304
Billion Billion
Billion
Copyright McGraw-Hill/Irwin, 2005
HOUSEHOLDS AS SPENDERS
Households as
Income Receivers
Households as
Spenders
The Business
Population
COMPOSITION OF CONSUMER
EXPENDITURES, 2002
Legal Forms of
Business
Services
$4,317 billion
(59%)
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
Previous
Slide
Durable Goods
$872 billion
(12%)
Nondurable Goods
$2,115 billion
(29%)
Next
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End
Show
5-8
Copyright McGraw-Hill/Irwin, 2005
THE BUSINESS POPULATION
Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
Previous
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Next
Slide
•Plant
•Firm
•Multiplant Firms
•Vertical Integration
•Conglomerates
•Industry
End
Show
5-9
Copyright McGraw-Hill/Irwin, 2005
THE BUSINESS POPULATION
Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Business Shares of Domestic Output
Percentage of Firms Percentage of Sales
Corporations
20%
Partnerships
8%
Corporations
87%
Government
Finance
State & Local
Finance
Key Terms
Previous
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End
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5 - 10
Sole
Proprietorships
72%
Next
Slide
Partnerships 9%
Sole Proprietorships 4%
Copyright McGraw-Hill/Irwin, 2005
LEGAL FORMS OF BUSINESSES
Households as
Income Receivers
Sole Proprietorship
Households as
Spenders
Advantages
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
Previous
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End
Show
5 - 11
Next
Slide
•Easy to Organize
•Proprietor is Own “Boss”
Disadvantages
•Limited Resources
•No Help With Decision Making
•Unlimited Liability
Copyright McGraw-Hill/Irwin, 2005
LEGAL FORMS OF BUSINESSES
Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
Previous
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End
Show
5 - 12
Next
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Partnership
Advantages
•Easy to Organize
•More Management Skills
•Greater Resources Available
Disadvantages
•Difficulty Making Decisions
•Possibly Limited Financial Resources
•Partnership Continuity Problems
•Unlimited Liability
Copyright McGraw-Hill/Irwin, 2005
Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
Previous
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End
Show
5 - 13
Next
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LEGAL FORMS OF BUSINESSES
Corporation
Advantages
•Most Effective Raising Capital - Stocks,
Bonds
•Limited Liability
•Easy Expansion of Size & Scope
•Infinite Life
Disadvantages
•Corporate Regulations & Legal Expenses
•Some Unscrupulous Practices
•Double Taxation
•Separation of Ownership & Control
Copyright McGraw-Hill/Irwin, 2005
LEGAL FORMS OF BUSINESSES
Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
Previous
Slide
End
Show
5 - 14
Next
Slide
Hybrid Structures
•Limited-Liability
Company (LLC)
•S-Corporation
Principal-Agent
Problem
Copyright McGraw-Hill/Irwin, 2005
PUBLIC SECTOR: GOVERNMENT’S ROLE
Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
Previous
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End
Show
5 - 15
Next
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Providing the Legal Structure
Maintaining Competition
•Monopoly
•Regulation
•Antitrust
•Regulated Monopolies
Redistributing Income
•Transfer Payments
•Market Intervention
•Taxation
Copyright McGraw-Hill/Irwin, 2005
PUBLIC SECTOR: GOVERNMENT’S ROLE
Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
Previous
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End
Show
5 - 16
Next
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Reallocating Resources
•Market Failure
•Spillovers or Externalities
•Spillover Costs
•Legislation
•Specific Taxes
•Spillover Benefits
•Subsidize Consumers
•Subsidize Suppliers
•Government Provision
Copyright McGraw-Hill/Irwin, 2005
PUBLIC SECTOR: GOVERNMENT’S ROLE
Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
Previous
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End
Show
5 - 17
Next
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Reallocating Resources
•Market Failure
•Spillovers or Externalities
•Private Goods - Rivalry
•Excludability
•Public Goods and Services
•Nonrivalry
•Nonexcludability
•Free-Rider Problem
•Quasi-Public Goods
Copyright McGraw-Hill/Irwin, 2005
PUBLIC SECTOR: GOVERNMENT’S ROLE
Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
Previous
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End
Show
5 - 18
Promoting Stability
•Unemployment
•Inflation
Circular Flow Revisited
Adding the Government
Sector
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
PUBLIC SECTOR: GOVERNMENT’S ROLE
Households as
Income Receivers
Households as
Spenders
The Business
Population
$ COSTS
NET TAXES FLOW
TO GOVERNMENT
FROM BUSINESSES
Legal Forms of
Business
$ INCOMES
GOVERNMENT
RESOURCE
GOODS & SERVICES
MARKET
FLOW TO BUSINESSES
RESOURCES
INPUTS
Public Sector:
Government’s Role
Government
Finance
BUSINESSES
GOVERNMENT
HOUSEHOLDS
State & Local
Finance
Key Terms
Previous
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End
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5 - 19
GOODS &
SERVICES
Next
Slide
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
Copyright McGraw-Hill/Irwin, 2005
$ CONSUMPTION
PUBLIC SECTOR: GOVERNMENT’S ROLE
Households as
Income Receivers
$ COSTS
Households as
Spenders
$ INCOMES
NET TAXES FLOW
RESOURCE
TO GOVERNMENT
MARKET
FROM HOUSEHOLDS
GOODS & SERVICES
The Business FLOW TO HOUSEHOLDS
Population
FROM GOVERNMENT
Legal Forms of
RESOURCES
INPUTS
Business
Public Sector:
Government’s Role
Government
Finance
BUSINESSES
GOVERNMENT
HOUSEHOLDS
State & Local
Finance
Key Terms
Previous
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End
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5 - 20
GOODS &
SERVICES
Next
Slide
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
Copyright McGraw-Hill/Irwin, 2005
$ CONSUMPTION
PUBLIC SECTOR: GOVERNMENT’S ROLE
Households as
Income Receivers
$ COSTS
Households as
Spenders
RESOURCE
MARKET
The Business
Population
Legal Forms of
Business
$ INCOMES
RESOURCES
INPUTS
Public Sector:
Government’s Role
Government
Finance
BUSINESSES
GOVERNMENT
HOUSEHOLDS
State & Local
Finance
Key Terms
Previous
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End
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5 - 21
GOODS &
SERVICES
EXPENDITURES
FLOW TO
Next
Slide ACQUIRE RESOURCES
$ REVENUE
Copyright McGraw-Hill/Irwin, 2005
PRODUCT
MARKET
GOODS &
RESOURCES
SERVICES
FLOW TO
GOVERNMENT
$ CONSUMPTION
PUBLIC SECTOR: GOVERNMENT’S ROLE
Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
GOVERNMENT
$ COSTS
EXPENDITURES
FLOW TO
PRODUCT MARKET
GOODS & SERVICES
FLOW TO$ INCOMES
RESOURCE GOVERNMENT
MARKET
RESOURCES
INPUTS
Public Sector:
Government’s Role
Government
Finance
BUSINESSES
GOVERNMENT
HOUSEHOLDS
State & Local
Finance
Key Terms
Previous
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End
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5 - 22
GOODS &
SERVICES
Next
Slide
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
Copyright McGraw-Hill/Irwin, 2005
$ CONSUMPTION
GOVERNMENT FINANCE
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
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End
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Next
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Purchases & Transfers
•Government Purchases
Exhaustive
•Transfer Payments
Nonexhaustive
Percent of U.S. Output
Households as
Income Receivers
35
30
25
20
15
10
5
0
Copyright McGraw-Hill/Irwin, 2005
~ 5%
~12%
~ 22%
~ 18%
1960
2002
2002 Data
FEDERAL FINANCE
Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
Federal Expenditures
Pensions and Income Security
National Defense
Health
Interest on Public Debt
State & Local
Finance
Pensions &
Income Security
National
38%
Key Terms
Previous
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End
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5 - 24
All Other
15%
Next
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Interest
9%
Total
Defense
17%
Expenditures
Health
$2,011
Billion
21%
2002 Data
Copyright McGraw-Hill/Irwin, 2005
FEDERAL FINANCE
Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Federal Tax Revenues
Personal Income Tax
•Marginal Tax Rate
•Average Tax Rate
Government
Finance
Personal
Income Tax
46%
State & Local
Finance
Key Terms
Previous
Slide
End
Show
5 - 25
Next
Slide
2002 Data
Copyright McGraw-Hill/Irwin, 2005
FEDERAL FINANCE
Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
Federal Tax Revenues
Personal Income Tax
Payroll Tax
Corporate Income Taxes
Excise Taxes
State & Local
Finance
Key Terms
Excise Taxes
4%
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End
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5 - 26
Next
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All Other
4% Corporate
Income Tax
8%
Copyright McGraw-Hill/Irwin, 2005
Personal
Income Tax
46%
Payroll
Taxes
38%
Total
Tax Revenues
$1,853 Billion
2002 Data
STATE AND LOCAL FINANCE
Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
Previous
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End
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5 - 27
Next
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State Revenues
Sales & Excise Taxes ~ 47%
State Income Taxes
~ 36%
Corporate Income Taxes
License Fees
Lotteries
Intergovernmental
Grants
~22%
State Owned Utilities/Stores
Copyright McGraw-Hill/Irwin, 2005
STATE AND LOCAL FINANCE
Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
Previous
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End
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5 - 28
State Expenditures
Education
~ 36%
Public Welfare
~ 25%
Health and Hospitals
~ 8%
Highways
~ 8%
Public Safety
~ 5%
Next
Slide
Copyright McGraw-Hill/Irwin, 2005
STATE AND LOCAL FINANCE
Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
Previous
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End
Show
5 - 29
Next
Slide
Local Revenues
Property Taxes
Sales & Excise Taxes
72%
17%
Education
Welfare, Health, and
Hospitals
Public Safety
Housing, Parks, and
Sewerage
Highways
44%
Local Expenditures
Copyright McGraw-Hill/Irwin, 2005
12%
11%
8%
5%
STATE AND LOCAL FINANCE
Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
Previous
Slide
End
Show
5 - 30
Next
Slide
Local Revenues
Property Taxes
Sales & Excise Taxes
72%
17%
Education
Proprietary
Welfare, Health, and
Hospitals
Incomes
Public Safety
Housing, Parks, and
Sewerage
Highways
44%
of
LocalSources
Expenditures
Copyright McGraw-Hill/Irwin, 2005
12%
11%
8%
5%
FISCAL TRANSFERS
Households as
Income Receivers
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Intergovernmental Grants
Federal Transfers & Grants
State Grants to Local
Governments
Key Terms
Previous
Slide
End
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Next
Slide
Copyright McGraw-Hill/Irwin, 2005
functional distribution of income
personal distribution of income
durable goods
non-durable goods
services
plant
firm
industry
sole proprietorship
partnership
corporation
stocks
bonds
limited liability
double taxation
principal-agent problem
Copyright McGraw-Hill/Irwin 2005
monopoly
spillover costs
spillover benefits
public goods
free-rider problem
quasi-public goods
government purchases
transfer payments
personal income tax
marginal tax rate
average tax rate
payroll taxes
corporate income tax
sales & excise taxes
property taxes
BACK
END
Households as
Income Receivers
Next:
Households as
Spenders
The Business
Population
Legal Forms of
Business
Public Sector:
Government’s Role
Government
Finance
State & Local
Finance
Key Terms
Previous
Slide
End
Show
5 - 33
The United States
in the
Global Economy
Chapter 6
Next
Slide
Copyright McGraw-Hill/Irwin, 2005